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Weekly Newsletter, Monday, 02/04/2008

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Table of Contents

  1. Commentary
  2. Changes in Portfolio
  3. Portfolio Listing & Top Ten List
  4. New Plays
  5. Existing Plays
  6. Watch List

Leaps Trader Commentary

Not Alarmed!

The press could not mention often enough how crude fell -2.75 on Friday to close at $89. You would have thought it was $59 instead of $89. The drop was directly related to the OPEC meeting and the lack of any language suggesting they could cut production at the March meeting. Rest assured there will be comments from OPEC about potential production cuts if prices decline much further.

Long time readers know that the end of February and early March is typically a weak demand period for crude. The winter is leaving the Northeast and demand for home heating oil begins to drop. Driving has not picked up yet but will once spring weather appears in April. Because of this seasonal demand decline March is normally a weak period for crude prices. Refiners are going offline to switch from winter fuels to summer fuels and crude inventories rise. Once past March the summer demand season begins and prices should rise until the same cycle is repeated in September/October. Only that one is complicated by hurricanes.

Because we are entering the weak demand cycle we should expect some further weakness in crude prices. Support is currently about $87 and we could see that broken. If the U.S. markets continue to rally and recession fears ease over a solution to the bond insurer problem we could see oil prices move up again very quickly. Most of the movement on oil is based on perception rather than real numbers so the perception that a recession has been avoided will have IEA/EIA/OPEC raising their demand estimates and that will support higher oil prices. Lastly, if crude does begin to slip I do expect OPEC to start making comments about production cuts at the March meeting in hopes the comments will support prices.

Exxon and Chevron both reported earnings on Friday and there were plenty of differences. Exxon reported a profit for Q4 of a whopping $11.7 billion. That was about a billion more than their prior Q4 record back in 2005. Their full year profits were a hefty $40.6 billion and a record for any U.S. corporation. Their profit was almost as much as Microsoft offered for Yahoo. Full year revenue for Exxon totaled $404.5 billion or about what the Defense Dept spends each year. Exxon produces only about 3% of the world's oil. Exxon had a capex budget of $21 billion in 2007. They put the majority of their profits right back into exploring for more resources.

Chevron posted quarterly profits of $4.88 billion and full year profits of $18.7 billion and a record year for Chevron. Crude hovered around $90 for most of the quarter and about 50% higher then the prior year. That helped to fill their coffers with plenty of exploration bucks. Chevron saw profits on the refining side fall -79% due to the low crack spreads and higher royalties and Chevron also got a failing grade for reserve replacement. Analysts always look for something in excess of 100% to see if the company is going to continue to prosper in coming years. Chevron only managed a 10% reserve replacement in 2007. Exxon will not release their numbers for several more weeks. That was Chevron's 4th consecutive year at less than 100%.

Neither company issued a forecast but Chevron said major project delays would lower its 2008 production by about 150,000 bpd to 2.65 mbpd.

You may remember a couple weeks ago I reported on a memo from the Shell CEO to his employees about the end of easy oil. Nobody in an oil company ever uses the term Peak Oil but they can say the "end of easy oil." The forecast was pointed to the next 2-3 years as critical and after 2010 as becoming increasingly a problem to find and produce new oil. This week it was the recently retired CEO of Talisman Energy, Jim Buckee. Being recently retired frees a lot of tongues and Buckee was being interviewed on ABC radio from Perth Australia. The bottom line on the interview was "peak oil is here or hereabouts" meaning now or very soon. His outlook was for price stress again in Q3/Q4-2008 with crude prices reaching $150 or higher. The conversation continued with talk about what that was going to do to civilization in U.S. cities. Our cities built over the last 50 years typically have your residence at point A, your work at point B and where you shop at point C and all those points are miles and miles apart. Once gasoline rationing appears (either by law or price) that type of lifestyle is going to cease to exist.

Mexican officials confirmed an earlier prediction that production from Cantarell would likely drop another 200,000 bpd over 2008 to something in the range of 1.06 mbpd by year-end. Cantarell production was 1.26 mbpd in Dec-2007 and that was the lowest level of the year and a 16% decline. They are predicting another 16% decline in 2008. Elsewhere Chevron said major project delays would cut 150,000 bpd off their expected production. Another note from a big field in the Gulf was a 12-18 month delay of production start on another 150,000 bpd. Shell reported with their earnings that production fell for the 5th straight year and forecast that 2008 production would fall again. Production fell to 3.32 mbpd in 2007 from 3.47 mbpd in 2006. They reported 11 "material discoveries" in 2007 and added reserves of 1 billion barrels according to their report. However, according to the report some of those reserves must be "verified" before they can be counted. What a pile of crap. So far 2008 is not shaping up to be a banner year on the production side.

Gasoline prices are already expected to be over $4 per gallon on the coasts this summer. Be ready to pay up if you are going on a vacation by car.

Thank you Flowserve! We were rewarded on Friday with a +$14 spike in Flowserve (FLS). The company issued a press release raising guidance and bragging about how good business was for them. Bear Stearns took the bait and upgraded them to a buy. Shorts were squeezed and the rest is history. We just entered the FLS position past week.

Jim Brown


March Crude Futures Chart - Daily

March Natural Gas Futures Chart - Daily

April Gasoline Futures Chart - RBOB Daily

 


Changes in Portfolio

New Energy Plays

None - We need to wait for the seasonal weakness in March


New Non-Energy Plays
TEX $60.50 Terex Corp

Dropped Plays
CAM $43.99 Cameron *** Stopped $39 ***

New Watch List Plays Triggered

None


Portfolio Listing & Top Picks

****************
Top Ten List
****************

If you are looking to add another position this is my top ten list for this week. The target prices listed would be the ideal entry points for these stocks today. There is no assurance any stock will ever return to these support levels and you will need to make your own decision about an entry point above these levels. I believe these stocks have the best potential this week. The list will change from week to week based on technicals, fundamentals, crude prices and market action. The list is not sorted in any particular order.

****************

Back to ten favorites in the top ten list. The entry levels have been adjusted to fit the new levels we are seeing in the sector.

The yellow means they are very close to those entry levels and green means they are at the target level.


 


New Plays

Most Recent Plays

TEX $60.50 - Terex Corp

We have played TEX before as a sideline business to the energy sector. TEX is a diverse company with one of its segments constructing equipment for the refining sector. TEX lost about 50% of its value from October to January on worries about a global slowdown in construction activity. After establishing a possible bottom in January at $50 they appear to be headed higher again. The aggressive action by the Fed has calmed fears of that slowdown.

Company Info:

Terex Corporation is a diversified global manufacturer with 2006 net sales of $7.6 billion. Terex operates in five business segments: Aerial Work Platforms, Construction, Cranes, Materials Processing & Mining, and Roadbuilding, Utility Products and Other. Terex manufactures a broad range of equipment for use in various industries, including the construction, infrastructure, quarrying, surface mining, shipping, transportation, refining, and utility industries. Terex offers a complete line of financial products and services to assist in the acquisition of Terex equipment through Terex Financial Services.

Buy: Jan 2009 $70 LEAP Call VXQ-AN currently $8.60


 


Play Updates

Existing Plays

CAM $42.12 -1.87 Cameron *** Stopped $39 ***

CAM posted earnings of $126 million for the quarter compared to $96 million in Q4-06. This was a huge boost and easily beat street estimates. However their full year guidance for 2008 of $2.45 to $2.55 per share was below the $2.63 street consensus. CAM was knocked for a $6 loss at the open on Thursday to trigger our stop at $39. CAM recovered $5 of that loss by Friday's close and I would not hesitate to reenter it over $45.

Breakdown trigger: $42.50, hit 1/22

Position: 2009 $50 LEAP Call OKA-AJ @ $5.50, exit $3.90, -1.60

*********************

PBR $113.06 +8.44 Petrobras *** Stop Loss $88 ***

No weakness in Petrobras with a very nice rebound to resistance at $115. Petrobras reported it was going to bid to win the assets in South America owned by Exxon under the Esso brand. Esso controls more than 7% of the Latin America fuel distribution market and Petrobras intends to be the high bidder.

Breakout trigger: $101.50, hit 1/24

Position: 2009 $110 LEAP Call XVQ-AB @ $12.70

**********************

VLO $60.17 +5.58 Valero *** Stop Loss $47 ***

VLO reported strong earnings despite the lower crack spreads and proved once again why their decision to upgrade their refineries over the last few years to process heavy sour crude was a good idea. VLO beat street estimates of 64 cents with earnings of $1.02 and spiked $4 on the news. There was no sell off and with traders anticipating a high priced gasoline season it should move higher from here.

Breakdown trigger: $50.00, hit 1/23

Position: 2009 $60 LEAP Call VHB-AL @ $5.00

**********************

FLS $96.40 +14.01 Flowservev *** Stop loss $74 ***

We got a near perfect entry on the prior week's dip at $77.50 and were rewarded with a +14 bounce after Flowserve raised guidance and was upgraded by Bear Stearns to a buy. No complaints here.

Breakdown trigger: $77.50, hit 1/22

Position: July $90 Call FLS-GR @ $6.00

*********************

FLR $126.17 +5.22 - Fluor Corp

FLR rebounded strongly off the CAM induced drop at Thursday's open to post a nearly $5 gain on Friday alone. FLR appears ready to break resistance at $126 and head north. FLR announced a 25% increase of their dividend on Thursday.

Earnings schedule: Feb 28th

Breakdown trigger: $145 Hit 12/13

Position: 2009 $160 LEAP Call XOB-AL @ $22.30

Remediation plan: 1/20
LONG: April $110 Put FLR-PB @ $9.20
SHORT: Jan $170 LEAP Put XOB-MN @ $58.40

*********************

RIG $125.44 -1.67 - Transocean Inc

RIG was knocked for a loss on the CAM earnings but recovered most by Friday's close. Still two weeks before earnings and no other news.

Earnings schedule: Feb 20th

Breakdown trigger: Hit 12/4 @ $130

Position: 2009 $140 LEAP Call VOI-AH @ $15.80

******************

JEC $80.22 +3.04 Jacobs Engineering Group *** Stop $70 ***

Another week of contract wins and JEC appears poised to break resistance at $80. No specific news worth repeating.

Earnings: Jan 22nd, +61%

Breakdown target: $80.00 Hit 11/12

Position: Jan-2009 $90 LEAP Call VJE-AR @ $10.40

Closed: APR 2008 $90 Call JEC-DR @ $6.50, exit 1/20 @ $3.10

*********************

CLB $114.54 +1.89 Core Labs

No news, closed at the high for the week while we wait on earnings.

Earnings schedule: Feb 14th

Breakdown Trigger: $130 hit 11/12

Position: 2009 $140 LEAP Call ZYM-AH @ $21.30

Remediation addition:
Position: June $130 Call CLB-FF @ $6.10

************************

FWLT $71.80 +6.23 - Foster Wheeler

No specific news but the post split depression was very limited. Friday's close was a three-week high. I think FWLT is about to make its move.

Earnings schedule: Feb-26th

2:1 split on Jan-22nd.

Breakdown trigger: $67.50 hit 11/06 (post split)

Position: (2) 2009 $75 LEAP Call ZHF-AO @ $14.55

*******************

XOM - $85.95 +2.01 Exxon Mobil *** Stop Loss $82.00 ***

How can you not like a company that earns $11 billion a quarter? No specific news other than earnings. Adding a stop loss just in case.

Breakdown trigger: $88 Hit 11/01

Position: 2009 $100 LEAP Call ODU-AT @ $7.90

********************

NOV $62.69 -.88 - National Oilwell Varco

NOV lost ground on the CAM earnings but appears to be recovering. NOV earnings are Wednesday.

Earnings schedule: Feb 6th

Breakout Trigger: $80, hit 10/11/07

Position: 2008 May $90 Call NON-ER @ $7.20

***********************

HP $40.32 +4.55 Helmerich & Payne *** Stop Loss $29.50 ***

HP beat street estimates of 94 cents with profits of $1.02. This was a new record for HP. HP also said it had contracts to construct and operate 11 new FLEX rigs. This brings to 94 the number of new build orders HP has gotten since March 2005. 80 have already been completed bringing the total in the HP fleet to 129. HP has a total fleet size of 167 U.S. land rigs and 27 international rigs and nine offshore platform rigs.

Earnings: Jan-31st $1.02

Position: Jan 2009 $35 LEAP Call ZQA-AG @ $4.50

Insurance put:
Position: Nov $30 HP-WF. @ .50, Stop $28.50


****************************
Non-Energy Positions
****************************

SGR $58.84 +5.34 Shaw Group

Shaw completed its shareholder meeting without any material news but the share price closed at a new two week high on Friday. Support at $53 held and the next overhead test could be $65.

Breakdown trigger: $55 Hit Jan-16th

Position: 2009 $60 LEAP Call OWA-AL @ 11.50

*******************

MOS $93.47 +2.07 - Mosaic Co

After an $11 rebound the prior week we should be happy with any follow on gain. MOS is going to present at the Goldman Sachs conference on Feb-12th. No complaints and no other news.

Breakdown trigger: $85 Hit Jan-10th

Position: 2010 $100 LEAP Call LXW-AT @ $24.20


****************************
Covered LEAP Calls
****************************

AAPL $133.75 +3.74 Apple Inc *** Covered LEAP Call ***

On Thursday I thought the weakness was over and we were about to see a rebound begin. On Friday sellers returned but in much less volume. I am still positive on Apple but I may be the only one.

Close the short 2009 $200 LEAP currently $9.40
Short the 2009 $150 LEAP Call currently $20.80

That will reduce our cost in AAPL as follows:

LONG AAPL @ $177.52 (Jan-14th open)
Closed $200 LEAP Short ($30.00 - 9.40 = gain +20.60)
Short $150 LEAP @ $20.80
AAPL cost basis $177.52 - $41.40 (20.60 + 20.80) = 136.12

When Apple starts to post a new positive trend we will do a put spread to recover some more money. First we wait for the trend.

Position:
Long: AAPL @ open of $177.52 (Jan-14th open)
Short: 2009 $200 LEAP Call OBR-AT @ $30.00
Breakeven: AAPL @ $136.12

********************

RIMM $92.24 +1.19 Research in Motion - Covered Call Stop Loss $80

Dead flat. No news other than the continuous stream of press releases on Blackberry developments from RIMM. It appears the whacking RIMM investors received knocked the life out of them. I see no reason to exit and we know how well RIMM can move once investors become motivated.

See the Jan-13th LEAPs newsletter for the description of the change in the options.

Alert entry 11/12 @ $102.60

Covered LEAP Call:

LONG RIMM @ $102.60
SHORT 2009 $110 LEAP Call VHO-AB @ $18.30 on 1/14/08

Closed:
SHORT 2009 $150 LEAP Call XTB-AJ @ $18.50, close $9.40 1/14
 


Leaps Trader Watch List

Dropped Entries
None

New Watch List Entries
CAM
Cameron
UNT Unit Corp

Current Watch List

CAM - Cameron

CAM posted excellent earnings but disappointed on guidance to stop us out of the last position. I am going to reinstate CAM on a trade at $45.

Company Info:

Cameron International Corp., formerly Cooper Cameron Corporation, is an international manufacturer of oil and gas pressure control and separation equipment, including valves, wellheads, controls, chokes, blowout preventers and assembled systems for oil and gas drilling, production and transmission used in onshore, offshore and subsea applications and provides oil and gas separation, metering and flow measurement equipment. It is also a manufacturer of centrifugal air compressors, integral and separable gas compressors and turbochargers. The Company's operations are organized into three separate business segments: Drilling & Production Systems (DPS), formerly the Cameron segment; Valves & Measurement (V&M), formerly the Cooper Cameron Valves segment, and Compression Systems (CS), formerly the Cooper Compression segment. In January 2006, the Company acquired the assets and liabilities of Caldon Company.

Breakout trigger: $45.00

Buy: 2009 $50 LEAP Call OKA-AJ

********************

UNT - Unit Corp

Unit formed a nice base at $45 and has rebounded to resistance at $50 and appears about ready to break that resistance and sprint higher.

Company Info:

Unit Corporation (Unit), through its three principal wholly owned subsidiaries, Unit Drilling Company, Unit Petroleum Company and Superior Pipeline Company, L.L.C., contracts to drill onshore oil and natural gas wells for its own account and for others (land contract drilling); explores, develops, acquires and produces oil and natural gas properties for its own account (oil and natural gas exploration), and buys, sells, gathers, processes and treats natural gas for its own account and for third parties (mid-stream). Units existing contract drilling operations are focused primarily in the natural gas producing provinces of the Oklahoma and Texas areas of the Anadarko and Arkoma Basins, the Texas Gulf Coast, the North Texas Barnett Shale and the Rocky Mountain regions. Units primary exploration and production operations are also conducted in the Anadarko and Arkoma Basins and in the Texas Gulf Coast area with additional properties in the Permian Basin.

Breakout trigger: $52.00

Buy: Sept $55 Call UNT-IK
 


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